Why startups are securing bridge funding in 2023 and how it could be a smart move for you.
Bridge round. It’s a small term with a big impact—especially if you’re a tech startup founder looking to source your next investment in 2023. In this feature, we explore the meaning behind bridge financing, its relevance, and how and when it can help your startup.
Understanding bridge round
Bridge round, often called bridge financing, do exactly what they say on the tin. They connect investment financing, such as two separate venture capital rounds, and “bridge” them together by providing interim funding.
For the most part, a bridge round is pretty straightforward. They’re quicker and less exhaustive compared to standard venture capital funding. Most importantly, they provide the necessary financial need to help a business look forward when the going gets tough.
Make no mistake about it, 2023 is proving to be a tough year for tech startups—with more potential challenges to come. That’s why at Diadem, we’ve coined 2023 as “the year of the bridge round”.
In fact, securing bridge financing could be the smartest financing move you make in 2023 to see the year out.
Why 2023 is the year of the bridge round
Across the spectrum of the tech industry, purse strings are tightening. It’s much more difficult to get funding as the market boom, caused by inflated business valuations based on raised capital, has crashed.
In fact, VC backing for US-based startups has continued to fall for 13 consecutive quarters. With investors feeling nervous, unrealistic expectations have collided with reality.
Hindsight has made funding harder to obtain, leading to a downturn in available venture capital and resulting in “the year of the bridge round”. But all is not lost. Any startup that survives 2023 can go on to do great things. To do so, businesses need the help of existing investors—so don’t give up. Investors, time to back your founders.
Things are improving. Valuations have settled down and enterprise valuations are leveling out between multiples of five and eight. This is rebuilding confidence with investors. It’s much more in line with what they want and expect to see before striking a deal—and they will.
This is bridge capital. This is why it matters.
How a bridge round can support your tech startup
A bridge round provides funding between investment rounds, such as Series A and Series B—there’s no shame in admitting that an extra layer of cash is needed. After all, we all need a healthy P&L statement. How bridge financing is used, however, is different from startup to startup. Here are some examples.
Let’s not shy away from the truth here. Tech startups, like businesses in many other industries, fail because they run out of cash. It happens, and it’s not always the result of bad management, either. Market changes, economic factors, and yes, even unexpected events like global pandemics can throw a company off course in no time at all. Having said that, this is exactly why a bridge round is a smart move—they provide the necessary funding to help you steady the ship and stay operational.
Business is booming and you’re on the cusp of success. The thing is, realizing your goal is just a little out of reach and an interim funding top up is what it’s going to take to hit that objective. What next? A bridge round. A more successful, developed business has a higher value—higher value means more profit. Bridge financing can support your pace without the need for time-consuming investment sourcing, or hunkering down and waiting things out.
The thing about a bridge round is it’s even used by established businesses to promote their latest push towards success, or even prepare for an IPO. In the event of going public, bridge financing can support a company ahead of any potential mergers and acquisitions, drive price changes that impact competitors and disrupt markets in their favor, and get the support they need to launch their latest innovation.
Rather than reactively responding to negative economic headwinds, a bridge round can support businesses that are attempting to challenge market conditions brought on by competitors. We’ve talked about how a business could use bridge financing to disrupt a market in their favor; but in this case, it’s about how capital can be deployed to counteract a change. Whether keeping up with a competitor or unexpected market expansion, this is another reason why bridge financing can be beneficial to your startup.
Not all investors are keen
For some investors—not all, we must say—a bridge round is still viewed as a last resort. Although their value can’t be understated, note that not everyone will be so enthusiastic about providing interim financing to your startup.
Why? Well, bridge financing is no guarantee of success, and it won’t be able to course-correct all forms of financial stress and growth challenges. Not all businesses will survive and interim financial support may just be delaying the inevitable—a major reason why some investors will step back.
Any new investors will expect current backers to contribute to the round. Where capital is being raised for recovery or survival, expect questions on expenditure and why previous funding hasn’t resulted in forecasted growth.
Though a bridge round support businesses during these tricky transition periods in between raising other forms of capital, there’s also the element of need. Focused, proactive, and intelligent forward planning can free up the funds needed to conserve cash; even if that means putting plans for growth on temporary hold while you concentrate on profitability—or simply getting through the stormy times to sunnier skies ahead.
Same investment capital, new solutions
At Diadem Capital, we’re revolutionizing the way startup tech founders meet their investment goals. No more lengthy, exhaustive, and often unsuccessful meetings. We match your startup to carefully vetted VCs, lenders, family offices, angel investors, and much more through genuine data. This is what makes us founder-friendly and VC-accepted, and this is what we’re passionate about.
Sign up for our platform today and start to grow. We’re ready, are you?